QR Energy

1/6/2014

QR Energy (QRE) is an upstream Master Limited Partnership (MLP) focused on delivering stable cash flow from US oil and natural gas production and growing through accretive acquisitions of mature, conventional properties. QRE operates in a segment of the energy sector that's engaged in the acquisition, exploitation, development and production of oil and natural gas properties. The company’s properties consist of 4,527 gross producing wells located in Alabama, Arkansas, Florida, Kansas, Louisiana, Michigan, New Mexico, Oklahoma, and Texas (see below). It has an estimated net proved reserves of 99.1 Million Barrels of Oil Equivalent (MMBoe) of which 75% is developed and 68% contains Oil and Natural Gas Liquids (NGL). QR Energy, LP was founded in 2006 and is headquartered in Houston, Texas.

Oil and Natural Gas Locations

Master Limited Partnerships

An MLP are not like a regular corporation. Apache Oil Company was the first MLP established in 1981 when the IRS created MLPs and established them as part of the US tax code. MLPs were created to be a unique type of business organization. In order for a publicly traded company to be considered an MLP the company or partnership must derive approximately 90% of its cash flows from real estate, natural resources or commodities. Once established, the organization enjoys the advantage to being organized as an MLP which combines the tax benefits of a limited partnership with the liquidity of a publicly traded company. A master limited partnership does not have to pay any taxes from it’s profits as long as approximately 90% of the profits and all of the tax liability is passed to the individual unit holders. These unit holders, upon receiving their distributions, are then responsible for paying the tax.

Master Limited Partnerships normally have two types of partners. The first one is a Limited Partner who is the person or group of persons who provide the capital to the MLP and receives periodic income distributions from the MLP's cash flow. The second type is the General Partner who is responsible for managing the MLP and receives either a fixed fee or receives compensation that is tied to the profit of the underlying business. Limited Partners are only liable for the amount they've invested, unlike the General Partner who has unlimited personal liability.

During the development stages of a limited partnership, when costs tend to exceed any revenues, partners invest capital and then receive the tax benefit of a personal income tax deduction for part of the loss during this stages of the partnership. Limited partnerships are common when businesses are in development stages, but Master Limited Partnerships are unique in that their units are traded publicly like stock, creating much more liquidity for investors.

A similar type of organizational structure is the Limited Liability Corporation (LLC). One of the primary difference between organizations structured as MLPs versus organizations structured as a LLC is that LLCs are established without the requirement for a General Partner.

For a visual understanding of MLPs please see the video below.

QRE Stock Appreciation

Companies that pay out 90% of their profits to their shareholders or unit holders (MLPs, BDCs and REITS) will normally not see their stock price increase over time because they're retaining only 10% of their earnings for internal growth. Their stock will instead remain steady or just slightly increase over time and generally is pegged at a industry competitive multiple of it's dividend. QRE is no exception. QRE has remained on either side of $17 throughout the year and has wavered primarily within the range of $16 and $18 (see below). As long as QRE maintains a dividend of $1.95 I expect the share price to remain near this same level. The company, however, continues to look for promising property acquisitions to increase their inventory of oil and natural gas as well as new technologies for enhancing existing fields, increasing its earnings and hence, potentially increasing its dividend. In addition, their ability to raise additional capital in the future and the cost associated with raising that capital in order to increase its inventory of oil and natural gas properties will also affect the company's ability to increase their income and future dividends. Any future increases in the dividend as a result of the above actions would likely increase the value of the stock as well.

One Year Stock Chart

Revenues

Revenues look encouraging and they have been increasing steadily since 2009. It is estimated that revenues will continue to increase well into 2014. QRE's desire to acqure of new properties going forward and the continual exploitation, development and production of the existing oil and natural gas properties should ensure that those revenues continue to increase.

Year
2014
2013
2012
2011
2010
2009

Revenues (Millions)
$556.51 (Est)
$471.00 (Est)
$371.99
$360.90
$262.37
$72.80

Earnings

Earnings have been somewhat sporadic between 2009 and 2012 but earnings have come in strong in 2013 at $1.18 and estimates are that it will increase again next year to $1.30. While fully diluted EPS were going up and down, net income was generally moving up. It appears that QRE is starting to get it's income statement in order so EPS should start to move up hand-in-hand with increases in net income. These numbers will obviously have to be monitored going forward to ensure that the company is making the right moves in controlling those extraordinary items.

Year
2014
2013
2012
2011
2010

EPS
$1.30 (Est)
$1.18
$0.00
$1.09
-----

Net Income (Millions)
--------
--------
$79,751
$88,295
$19,876

Dividends

Dividends have been increasing annually and the dividend for 2013 is $1.95 per share (dividends in 2012 were $1.925 and in 2011 were $1.2823). At the current price of $17.23, QR Energy yields 11.32%. A drop in the stock price of less than $1 to 16.25 would increase the company's dividend yield to 12% annually or one percent monthly (an excellent return by any measure). This kind of drop in price is well within the stock's price range experienced within the last year and could possibly be a good entry target.

The dividend is also being changed from a quarterly distribution to a monthly distribution starting in January 2014 (see the downloadable company statement below titled "QR Energy Announces Monthly Cash Distribution"). The current quarterly distribution of $.4875 will now be split into 3 monthly distributions of $.1625 each. Investors interested primarily in dividends rather than capital gains are usually retirees looking for income to augment their company retirement or monthly Social Security payments. They are also generally looking to match their dividend income to their monthly obligations and monthly dividends are extremely appealing to that group of investors. Since similar upstream oil and natural gas companies like Vanguard Natural Resources (VNR) pay dividends in the area of 8-9%, it's possible that QRE's stock price could easily drift higher to the range of $21-$22 to approach a similar dividend yield.

Quarterly Dividends

Why I like this stock and why I'm investing in it

I generally like equities that fall into the category of Dividend Growth stocks. And the ones that I especially like are those that are included on the Dividend Aristocrat List. QR Energy is not one of those stocks because it hasn't been paying dividends for 25 years and hasn't demonstrated a legacy of increasing dividends either.

It does, however, fall into another group of equities that I like to accumulate. These are equities that don't usually increase in price but instead throw off large amounts of income in the form of dividends. In the case of QRE, that dividend is $1.95 per share, which is a dividend yield of 11.32%. That amount is in excess of the 8% total return I look for when I'm researching any investment. That amount will also provide me with a 3.32% cushion in case the price of the stock falters.

Another advantage of QR Energy is the fact that it's optionable. With options I can use Puts to get into this stock and Calls to get out of this stock and I can generally add an additional 1/2% or better increase in yield per month. With an 11.32% dividend and the potential of an additional 6% return from options, this will continue to be an exceptional investment.

Competitors

Competitors of QR Energy in this field of acquiring, exploiting, developing and producing oil and natural gas reserves that would be of interest to my style of investing which is striving for an 8% annual total return would be any of the following upstream MLPs:

BreitBurn Energy Partners (BBEP)*
Legacy Reserves (LGCY)
Linn Energy (LINE)*
LRR Energy (LRE)
Memorial Production Partners (MEMP)
Mid-Con energy Partners (MCEP)
Vanguard Natural Resources (VNR)*

*I currently own stock in BBEP, LINE, and VNR.

QR Energy Fact Sheet